Magazine article The CPA Journal

2010 Storm Losses May Provide an Enhanced Tax Benefit

Magazine article The CPA Journal

2010 Storm Losses May Provide an Enhanced Tax Benefit

Article excerpt

In 2010, severe storms, flooding, and winter weather wreaked havoc - including water damage to buildings, downed trees, and beach erosion - throughout the New York, New Jersey, and Connecticut tristate area. A temporary relaxation of IRS limits for deducting casualty losses (defined in the Treasury Regulations as caused by an event that is "sudden, unexpected, or unusual"), coupled with a provision that allows certain losses to be deducted in the year before they occur, may allow some property owners who have experienced such damage to receive tax benefits for which they would not otherwise be eligible.

Disaster Relief

A 2008 tax law, the National Disaster Relief Act, provided enhanced tax relief for victims of federally declared disasters occurring in 2008 and 2009. Proposals extending these provisions to disasters occurring in 2010 were not included in the final tax law signed by President Obama in December. Nevertheless, taxpayers affected by federally declared disasters occurring in 2010 may still be able to take advantage of the provisions of the 2008 act. Although casualty losses generally must be deducted in the year the casualty occurs (even if repair expenses are incurred in a later year), under IRC section 165(i) taxpayers may elect to deduct disaster area losses in the year preceding the loss year. Thus, 2010 disaster losses may be deducted in 2009. Because the law says that losses claimed in a prior year under this election are treated as if they occurred in that prior year, claiming a 2010 loss on the 2009 return allows taxpayers to take advantage of the special rules that applied for 2009. For eligible 2010 losses, the election is made by filing an amended 2009 return, and must be done so by the due date - including extensions - of the 2010 tax return.

A loss must first be reduced by the amount of any insurance proceeds received. Tax rules for deducting casualty losses then call for a floor for each incident, which is normally $100 but was increased to $500 for 2009 only. For non-disaster-area losses, the amount of loss above the floor is deductible only to the extent that it exceeds 10% of adjusted gross income (AGI). For example, if a taxpayer with an AGI of $200,000 experienced an uninsured 2010 loss of $1,800, she would receive no tax benefit on the 2010 return because the loss does not exceed the total of the $100 floor plus 10% of AGI ($100 + $20,000 = $20,100). These rules apply only to personal losses. The full amount of eligible losses to business property can be deducted on the business return.

Under the 2008 act, the 10%-of-AGI limit was completely eliminated for disaster-area losses occurring - or treated as occurring - in 2008 or 2009. Many local areas, on a county-by-county basis, received this designation after the storms of this past spring and fall. In addition, in early January 2011, Federal Emergency Management Agency (FEMA) inspectors were assessing damage in Suffolk County, N. Y., and 13 New Jersey counties in the wake of the blizzard of December 26-27, 2010, to determine if disaster declarations are warranted for those areas. The New York, New Jersey, and Connecticut counties affected by these events are listed below. Nationwide, more than 80 disasta: events qualifying for the special relief occurred in 2010 - for the complete list, see www.fema.gov/news/disaster_totals_ annual.fema (The December 26-27 blizzard, if any disaster designations are made, will appear there as 2011 declarations. …

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